Final Chance for Czech Citizens over 35 Years Old to Enter the 2nd Pillar

Jun 13, 2013

An Interview With Pavel Jirák, Chairman of the Board of KB Penzijní společnost (KB Pension Company) and member of the Presidium, The Association of Pension Funds of the Czech Republic

Interest in the new pillars of the pension system is growing slowly among Czechs. Despite the slow start of the system, it seems in recent weeks Czechs are realizing the 2nd pillar makes sense for a great many of them. “Given the aging population and worsening state of public finances, private pension savings are the best we can do for us and our loved ones,” says Pavel Jirák, Chairman of the Board of KB Penzijní společnost (KB Pension Company) and member of the Presidium, The Association of Pension Funds of the Czech Republic.

Your pension company is among largest in the Czech market. How do you manage to encourage Czechs to enter the new pillar?
I would lie if I said we’re happy with the results and interest of Czechs. However, this corresponds with our expectations. In the last few weeks, interest is growing – particularly in regard to the fact that citizens beyond 35 years of age will not be able to enter the second pillar after July 1, 2013. We’re responding to thousands of daily requests and writing hundreds of contracts.

Do you have a contract in the 2nd pillar yourself?I do. I’m convinced that entry to the 2nd pillar is advantageous to a great many citizens, not just those with above-average incomes. People close to me agreed when we discussed the possible arguments for and against entering. In most cases, the benefits exceeded the uncertainty and fear of something new.

Who benefits by entry to the 2nd pillar?Generally, various analyses show the 2nd pillar is particularly advantageous for younger people and people with above-average income. However, most of these analyses count on a presumption that state pensions will increase equally to average wages. Because of an aging population and lower birth-rates compared to periods prior to 1990, it’s apparent that state pensions will grow slower than wages. We realistically expect that in 30 years or more, state pensions compared to average wages will be at half the current level. The 2nd pillar is financially beneficial to practically any young person up to thirty-five. I would even dare to say it will be much more beneficial than it appears today.

Can you estimate how much the funds will increase in value?

Of course, I cannot guess particular increases in value. It depends upon a whole range of factors. But purely from a financial model, using certain simplifications, I would say the 2nd pillar is the best financial product on the Czech market. Participant’s every deposit, in the form of a payment of social insurance increased by 2% gross salary, is matched by a 3% contribution from the state, allotted from the state pension insurance. This is a very decent increase in value. There is a decrease of the state pension, but it’s negligible, particularly for members with above-average income. Not only that, the savings can be inherited!

The limit of 35 years is very important, because people older than 35 years can only enter the 2nd pillar until the end of June. How exactly does the age of the client influence the advantages of entering the 2nd pillar?

For people between 35 and 55, entry to the 2nd pillar is more advantageous if they have at least an average salary. Additionally, as you say, Czechs older than 35 will have to make a decision by July 1st of this year. Younger Czechs can enter the 2nd pillar at latest by the time they reach 35, but given the goal of saving as much as possible for their pension, they have no reason to delay that decision until they are 35.

A number of our readers are in top managerial positions or own their company. Briefly summarize how the pension reform impacts employers?

As a whole, the reform brought additional advantages to the system and new opportunities for employers to save costs in compensating their employees. In case of the 2nd pillar, the very important issue for employers is that 2nd pillar contributions on the employee’s behalf are easy to administer and only a minimal burden to payroll accounting.

In case of the 3rd pillar, these advantages and economic arguments are generally known: the employer’s contributions are 100% expense items. Contributions up to 30,000 CZK per employee (prior to 2012 was 24,000 CZK) are not subject to health and social care insurance payments, which is very important to some industries. Employers contributing to the 3rd pillar create better initial conditions for the requirements of early retirement.

Profile of KB Penzijní společnost
KB Penzijní společnost is among the largest institutions in the area of pension savings. It is a 100% filial company of Komerční banka and maintains assets exceeding 33 billion CZK for more than 560,000 participants. In the last three years, it received The Best Pension Fund in the Czech Republic award.
Contacts for KB Penzijní společnost:www.kbps.cz